Blockchain Fever: The Potential And Challenges Of Blockchain Technology

In last week’s episode of Forrester’s What It Means podcast, Principal Analyst Martha Bennett disentangles the hype from the reality of blockchain technology — and provides a passionate perspective on blockchain’s potential as an economic engine.

Podcast transcript

Victor Milligan: Hi, I’m Victor Milligan.

Jennifer Isabella: And I’m Jennifer Isabella.

Victor Milligan: Your co-hosts for Forrester’s podcast, What It Means, where we explore the major changes in the market influencing executive priorities. On the phone from London is Martha Bennett, principal analyst, to discuss the hype and reality of blockchain. Welcome, Martha.

Martha Bennett: Hello, Victor and Jennifer and thank you very much for inviting me.

Jennifer Isabella: So, Martha, there have been a lot of headlines, press releases on blockchain. Why is everybody talking about blockchain?

Martha Bennett: That’s a very good question, and there’s a two-fold answer to that. The first part, I’ll keep very short because one of the reasons is Bitcoin, but this isn’t about Bitcoin and cryptocurrency. This is about the potential of the underlying technology, and not specifically the technology that underlies Bitcoin, but the general principle for what you can do with it. So let me just provide a little bit of context, and I’m not going into the detail of digital transformation because we’ve covered that plentifully elsewhere, but when you look at some of the characteristics of where things are going in terms of how business is being done, how customers relate to the companies from whom they’re purchasing, with whom they’re interacting, we’re looking at multi-stakeholder relationships, we’re looking at dynamic ecosystems that are replacing existing ways of doing business.

And, of course, we’re also in an environment where any product, service, and customer lifecycle has to be really efficient, really robust, as well as secure, simply because that’s what customers are expecting. And, of course, interacting anytime, anyplace, device of my choice, and all of that. And that actually calls for new ways of doing business, new ways of establishing trust, new ways of interacting to support those dynamic ecosystems. And that’s where blockchain technology comes in because it provides the potential of just developing new business and trust models.

Victor Milligan: So, in the concept of dynamic ecosystems, blockchain is really a part about trust, meaning I have a clear view of who the entity is, I’m able to transact with them efficiently with trust, and do that, and sort of align my processes so that I can quickly stand up a virtual ecosystem, bring it down, and trade quite easily among partners. Whether I’m trading in the financial sense or cryptocurrency sense, IP rights, or whatever it might be that is of value among people or companies. Is that a fair statement?

Martha Bennett: That’s a fair statement, and even beyond that because another way of looking at blockchain-based systems, they’re actually very, very good at automating entire processes. And when you have a process where many parties contribute and they’re all on the same system, and then it becomes quite obvious where the potential efficiencies come into it.

Jennifer Isabella: So, Martha, I think it would be helpful if you could define blockchain as simply as possible for the audience.

Martha Bennett: If we define a blockchain, a blockchain is a store of records with the following characteristics. It’s write-once, append-only, it’s cryptographically secured using hashes and PKI, but it’s not by default encrypted. That’s important to understand because that causes a few issues down the line because transparency is not always a good thing for data. It’s distributed and either completely or partially replicated, meaning many different companies have a copy of this database. And in it’s pure form, it’s also decentralized, meaning it’s not controlled by any single one party.

There are two main types, the so-called permissionless blockchains, and we all recognize the name of at least one of them. It’s called Bitcoin. The other well-known one is Ethereum. They’re characterized by the fact that anyone can play. There is no vetting. It doesn’t matter whether it’s yourself, your dog, or your cat, and you can be five people or whatever. Nobody checks. And that’s clearly not appropriate for enterprise use which is where the so-called permissioned blockchains come into it where the participants are known and validated. These are sometimes also known as private blockchains. But just to make life even more complicated, sometimes people say private blockchains only within one company. So again, without going further into the definition, don’t let terminology bamboozle you whenever somebody says blockchains. Figure out what they actually mean by it.

You may also hear the name distributed ledger heard — used synonymously. And that’s okay. It’s again a definitional thing. What is important to understand is that there is no such thing as the blockchain. Blockchain technology is an architectural concept. And any blockchain stack consists of the number of components. Which of these components are actually used and which flavor of the individual components depends entirely on the requirement of the use case in terms of, for example, scalability, in terms of privacy, and so on. And that’s probably enough said for the moment.

Victor Milligan: So why don’t we do a from/to, Martha. What is a from/to, to look at whether it’s logistics or in the banking sector where someone is sort of conducting business now a certain way and then five or 10 years from now may conduct business a different way because of forms of blockchain or flavors of blockchain as you described them are in place?

Martha Bennett: Okay. I’m glad you mentioned the kind of longer term aspect here because it is worth just stressing up-front as well that this is a very early stage technology. And I will get to examples. But we very often hear the blockchain today is where the Internet was in the early ’90s. And that’s not a bad analogy except that I’d dial it back a little bit further even and say it’s the late ’80s because we’re not even at the stage yet where we have any standards that enable anybody to build applications. But we are looking at an ecosystem where there’s a tremendous amount of innovation, lots of development. But it’s also worth remembering that it’s a complex technology topic. It’s hugely complex in fact made even more complicated by the fact that we’re often relying on algorithms that very few people understand, and in some cases haven’t even been assessed as to whether they are functioning as intended and whether they’re properly secure. So that’s why I stress that we’re really in an experimental phase and there are hundreds if not thousands of proofs of concept and pilot projects going on. And that’s obviously a good thing.

Victor Milligan: So, Martha, what is an equivalency to blockchain?

Martha Bennett: The first one I’ll use — many people have probably already have heard of. But it’s such a nice example. I still like citing it. And that’s a company that allows and supports the tracking of diamonds. And quite clearly diamonds are very valuable and you want to make sure that they have been properly and ethically sourced. And there, a blockchain based system makes absolute sense because you can record things in a secure and trusted way. You can track changes in ownership and you can provide access to different participants in the ecosystem. And that’s currently in operation. Not having replaced existing systems at this point, but really supporting the existing ecosystem in the way that there simply wasn’t a technology solution before.

And this brings me to another use case where we’ve not seen a real deployment yet but a lot of work to figure out how to get there, and that is in the logistics industry. And not just tracking goods because tracking goods per se isn’t necessarily anything new. We’ve got that. But when you look at the logistics industry, there are lots of different participants. And just saying those words, “Lots of different participants,” that’s a network of thought. But currently, it’s a network where each participant has its own systems, and within their system they have a complete view over what their part in a logistics value chain is, whether it’s the container company, or the truck company, or the manufacturer, whatever. What is lacking is for every participant in that value chain to see the rest of what’s going on.

And if I make it a bit more concrete, if I’m the trucking company and I’m expecting to have a container to be picked up at 12 o’clock tomorrow from the factory gate, then I will make sure I have a truck and a driver available at that time, but how would I know that actually there has been a manufacturing problem, and the container won’t be ready, because the goods aren’t there to be loaded into it? So my driver has to go away again. Having a blockchain based system, where everybody supports, supply just the data that is needed for the other ecosystem participants to see where everything is in — where all the moving parts are, then you can realign your own moving parts and obviously get great efficiencies. And those efficiencies, when you add them up, actually add up to a tremendous amount of economic value. And I hope that makes sense.

Victor Milligan: The examples you gave were interesting, and it sort of reminds me of this question around artificial intelligence and the typical arc around some of these new technologies, which is there’s an idea, in this case blockchain. Unfortunately, the marketer’s taken hostage, and everything is sort of called blockchain or affiliated with blockchain, and there’s a lot of solutions that are more faking it than real. You then lean in through a set of pilots and proof of concepts that are some proprietary solutions or near-solutions that has componentry or concepts of blockchain, but with the ultimate goal of coming into some standards arena to where people can participate or build blockchain environments that are built upon standards that are well understood. Is that a fair way of describing the expected journey of blockchain?

Martha Bennett: I think that’s a very fair way of describing it. And where we are at the moment, and I think I kind of touched upon that already, is that we have a number of key developments in the open source arena around Ethereum and around Hyperledger. And yes, Ethereum exists as a public blockchain, but because the code is open source, you can also use it for permissioned blockchains. And in fact, there is an initiative under way to make Ethereum itself more suited to meet enterprise requirements. So, you’ve got enormous innovation and big ecosystems around those two initiatives. You’ve also got lots of startups working on systems. Some of which are completely proprietary, some of which are derived from what was originally Bitcoin code. So yes, there are a lot of different things going on.

In parallel, you’re actually seeing some of the standards bodies become involved. Industry bodies are becoming involved. It is frankly too soon to tell how it will all shake out, whether things will coalesce around one de facto standard or maybe two, but we’re working on some form of interoperability, and whether de facto standards will then be turned into accredited ones or whether standards bodies actually contribute something as a catalyst there, that we will have to see yet. And I would say that within the next few years we’re seeing something settle down here.

Victor Milligan: And from a governing standpoint or maybe from a standards body standpoint, do you suspect that there’s going to be a US or a North America version, a European version? I mean, many standards sort of grew up regionally and then ultimately became global in their orientation. Or do you expect because of this hitting some of the global supply chains and trading environments that it’s going to be a global thing and it ultimately will be able to cascade into a regional context?

Martha Bennett: Right. At the risk of sounding like a typical analyst, I’ll say it depends in that I can well see that it makes sense to have some in-country systems running for the simple reason that it’s actually easier and simpler to get those going, because one of the biggest challenges in blockchain based systems is the cross-border nature of them. Simply because something transcends borders doesn’t mean we can suddenly ignore the jurisdiction of another jurisdiction. The world just doesn’t work like that. And I have examples already where a project that started out as a cross-border trial where the regulator actually said, “If that’s what you want to do, you have to fulfill the following conditions,” and so they said “Okay. Let’s just keep it in-country for the moment because this is one step too far.” But you made a very, very key point here.

Government and regulators really need to be involved with this because if we do want to realize the efficiencies for consumers, citizens, enterprises, then we’re needing — there needs to be change as well, not only on the part of companies maybe being prepared to share more than they’re currently prepared to share, then yes, we already have co-opetition, but we’re going to see a lot more development in how competitors need to work more in a collaborative way. Otherwise, we’re not going to go forward, and those that refuse will be the ones that get left behind. But at the same time, we need regulators and governments prepared to say, “Okay, if this requires a change in legislation, then let’s figure out how to do this.” And there is a lot of government interest.

Not everywhere is the discussion well advanced because there is a shortage of experts on this technology, and when you get governmental international bodies being advised purely by startups, you can imagine that it gets a little bit one-sided and biased. So, there is still a little bit of fluff, or a little bit — excuse me. Let me rephrase that. A lot of fluff and hype in it, but yes, that’s the direction of travel that we need to go in.

Victor Milligan: So underpinning blockchain obviously is a significant comment about data. Data management, data governance, and identity. And we’re at a time and place where a lot of firms are trying to respond to GDPR, which also has a very strong voice as it relates to data, data management, and identity. How would you relate blockchain with GDPR?

Martha Bennett: In some way, GDPR and blockchain are actually totally incompatible [laughter] because under data — and this is not just about GDPR, but under a lot of data privacy or data protection legislation, a consumer or citizen actually has the right to have certain data erased. If that data is on a blockchain, that’s supposedly not possible. Technically, it actually is possible with the required government mechanisms in place. And that’s actually one of the most heated discussions in the whole blockchain ecosystem because there is all this talk about immutability. And without wanting to go down the rat hole of defining immutability because there is no one single definition. But let’s just be clear. Data on a blockchain is tamper evident. If anybody tries to mess with it, you can see it unless some absolutely massive attack on the blockchain takes place. But equally the whole point is that you are adding to the data, you’re not removing anything, you’re not overwriting anything. And that puts you in straight conflict with those requirements for having data removed because it’s somebody’s right to have it removed.

Victor Milligan: So, one of the points that relates to GDPR is this idea that privacy is a human right. And that at some level that I, as a human, can sort of govern my own identity, whether I’m forcing companies to erase it and forget it or what have you. Is there something about blockchain that deals with how a human being, an identity is going to be managed in blockchain? Or what are some of the more far reaching ideas about that?

Martha Bennett: That’s another very interesting question. I wish I had a definitive answer, but you actually picked up a keyword here because you asked how. And that’s the bit that I’m still waiting to have explained conclusively. And when I say have explained from the ecosystem players because there is a lot of talk about identity on the blockchain. Self-sovereign identity. And two questions I have. One, how is this actually managed technically end to end? And so far, nobody’s been able to give me a satisfactory answer. But secondly, I’d also posit a more — I don’t know whether the word is philosophical. But the question around self-sovereign identity means not only do you have control over your data, which instinctively is always a good thing. But you’re also responsible for all of your data, and that includes you know, your medical records, your credit score, whatever it may be.

And my question there is, does everybody want to do that? Is everybody capable of doing that? You know, a person under stress might not be able to take the appropriate decision as to what they would release to whom under what circumstances. They’ll have questions there. And of course, from a privacy perspective, how can you really make sure that this is all secure while at the same time not making it so difficult to use for the individual that you end up with huge security vulnerabilities again?

Jennifer Isabella: Martha, I’m going to move the conversation a bit in terms of what needs to be in place to make blockchain a reality? We’ve talked about some of the challenges and some of the components necessary, but looking at it a little bit more holistically.

Martha Bennett: Okay. And obviously for completeness sake, I will start with saying the technology needs to be developed first. But I make this other statement because I’m confident it will be, simply because of all the innovation, all the work that is going on. What also needs to fall into place are issues that are absolutely not new. One I’ve already alluded to, and that’s how companies and government entities, public bodies, how they view collaboration and sharing of data and processes. But before we get there, and this is the really boring bit, in order to participate in a single network where the process seamlessly runs through between participants, you need to have common data definitions. You need to have agreed processes. And of course, that’s where the keyword is, agreed.

And when you look at, we’ve had plenty of initiatives to standardize, to arrive at common processes. Some of these are well advanced, and for example, I know I was told recently in a research interview that separate finance wouldn’t actually be too difficult to digitize because this is where globally terminology has already largely been agreed. Great, you’ve got a wonderful starting point, but that is not the case everywhere. So aside from agreeing how something should be represented digitally and what the process should look like, potentially getting government agreement and something else that needs to fall into place simply because we don’t have it yet. What are the actual business and operational models government frameworks as apply into these blockchain networks? We haven’t developed those yet.

Simple things like, what are the responsibilities of rights of the individual participants? What should be done when something goes wrong? And I’ll make a potentially controversial comment here, but what I have noticed is that the blockchain community features a very, very high proportion of idealists. And in many ways, of course, that is wonderful to see, but unfortunately, we cannot work on the assumption that human beings are inherently good and that every company with whom you trade is going to be prim and proper at all times. Sorry, that is just not the case. Criminality will always exist and criminals will always find the soft underbelly in that, and companies will always go bankrupt. So, all of these considerations also need to be baked into the government’s responsibility models and so on. And I don’t want to represent this as something impossible or anything. I’m just stating it as a matter of fact. This is what we need to look at. And that’s also why I always challenge companies when they say, “Oh, we’ve got a blockchain use case.” And I said, “Have you done your due diligence? Do you really need blockchain? Because you’re not going to be finished very quickly.”

Victor Milligan: So, a key part of your answer, Martha, was this idea that the technology, the architecture technology may, at the end of the day, be the easiest part of this equation. The hardest part is, what usually is the hardest part, which is human beings agreeing to things. And companies with disparate interest, maybe competing interest, actually coming to one common standard. So, in that context, are there groups that are leading the charge in the same way they did on the Internet? I mean, I know there are some groups like R3SEV and the Linux and DH. Are these industry groups capable of sort of moving that governance ball forward fast enough to allow the technology to be unleashed?

Martha Bennett: Yes, I think so. I’ve mentioned a high project within the Linux Foundation. You mentioned all three. And there are other bodies, I’ll mention another one, B3i, which is an insurance initiative. Then there are country-specific initiatives. In the Netherlands, for example there is a tremendous amount of activity around the different ecosystems for logistics being one of them, not surprisingly. There is a consortium initiative in India in the banking industry. So yes, absolutely. That is very much going on. And what we also see as part of those, and that’s why they’re so valuable because what we’re seeing in terms of the technology development is some of the architectures that are emerging are no longer what you might call pure blockchains, and that’s okay because in the pure blockchain, actually you’re almost trying to reconcile irreconcilable principles.

So, it’s great to see that degree of pragmatism that can only come when you’ve got industry experts with their main knowledge really working on this. Because otherwise, you get the kinds of pure tech-driven projects that I’ve seen millions, if not tens of millions, of dollars wasted on, where some wonderful technology gets developed and their main expert says at the end of it, “Yeah, but we can’t use that because it violates some core principles of either how we do business or even the law.”

Jennifer Isabella: Yeah, but I think that hits on an important point you alluded to earlier in the conversation in terms of sort of the guidance to the organizations of, start with the use cases. Don’t just obsess about the technology, but how are you trying to solve a problem and can blockchain help in that process?

Martha Bennett: Hoorah. Thank you for saying that [laughter]. Start with the use case. What is the problem that you’re trying to solve or what idea would you like to pursue? And then ask yourself some very simple questions, like do multiple parties need access to the same data? Do they need to update that data? Do they need a reasonable degree of assurance that the data hasn’t been tampered with? And, the two main points, is there no existing technology that can do it for you? And very importantly, are there good reasons for not wanting to have one single central party that actually runs it on your behalf? But yeah, that’s absolutely the way to set about it.

Jennifer Isabella: Since we’re in this period of time where blockchain is very new or even the technology doesn’t exist in some cases, what should organizations be thinking about or acting upon?

Martha Bennett: That’s, again, a very good question. And whether or not frequently, in particular, when companies feel that their resources are stretched already — they haven’t got enough people working in R&D or don’t even have an R&D department. And so I always say, “Really, look at what it may mean to you strategically. Just forget about today. What might your company look like in five years? Where could the threats come from? Where would your opportunities lie?” And then see how this technology would fit into it. And depending on your conclusions — because you may just say, “If somebody would like me to participate in a blockchain in five years’ time, okay, fine, come along, ask me to participate.” So keeping a watching brief is perfectly fine. If you have some resources there, then it’s also fine if you just experiment a little internally. Obviously, keep your ears and eyes open to see what’s happening in your industry. Watch what the consortia are doing.

If you want to become actively involved leveraging one of the blockchain tech specs, that is something that a lot of companies are doing, but it’s not obligatory. Unless you really see the importance and opportunity for your business, don’t do it. But there’s also a unique opportunity that we don’t usually get with an emerging technology, that for companies who have the appetite and the skill, you can actually become actively involved in shaping how this technology develops, how the capabilities of that technology come along in order to meet the requirements of your industry. And that, you can only do by really joining one of those consortia and contributing to the codes and helping develop those governance frameworks. But it’s a unique opportunity.

Victor Milligan: So Martha, we started with a concept that the business climate that we’re in and one we’re increasingly leaning towards is one where ecosystems and digital platforms begin to be a more dominant part of the landscape. Where data or the exchange of data among partners begins to be fueled. Sort of the currency of the world. So, it makes sense that blockchain or something like that is an essential part of making that efficient, trusted, automated, and those types of things. So, as we look at sort of the movement of blockchain, what does it mean right now to the industry that blockchain is coming?

Martha Bennett: I’ve been in emerging technologies for about 30 years now, and I’ve never come across anything like this where the aspiration is still so far away from what is actually happening in the technology today. Which is why it’s not quite clear where it’s going. Because there are a lot more moving parts than we have with the early Internet, which is why I probably somewhat evasively come back to my previous answers around looking where your industry could be going. And do you see, in where the technology is today, the seeds of what could it become within the next 5, 10, 20, and more years? And yes, we’ll see some smaller deployments or niche deployments come onstream a lot sooner. And again, once we see that, we’ll have valuable lessons on which to build, but it’ll very much be an incremental process. And it is definitely something for the long run.

Jennifer Isabella: Thanks for joining us today, Martha.

Victor Milligan: Thank you, Martha. It was great.

Martha Bennett: Thank you. If you like what you heard today, please subscribe to Forrester’s What It Means podcast on iTunes, Google Play, SoundCloud, Stitcher, or TuneIn. And don’t forget to leave us a review. To continue the conversation, follow Forrester on Twitter and LinkedIn. Thanks for listening.

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